Construction Accounting: The Basics Contractors Need

Why construction is different

Projects run for months, bill in stages and carry retainage, so monthly profit alone is misleading.

A general ledger built for a store does not show whether a $400,000 remodel is on budget. Contractors need costs coded by job, with categories for labor, materials, subcontractors, equipment and overhead.

Job costing

Job costing assigns every labor hour and material purchase to a specific project so you can compare actual cost to estimate.

1. Create a job number for each project.
2. Code every bill, timesheet and receipt to that job and a cost type.
3. Compare actual to budget weekly.
4. Update estimates for the next bid using real results.

This feeds better bidding. See the beginner's guide to bidding construction jobs.

Work in progress and revenue recognition

A WIP schedule compares billed amounts to the percent of work completed, showing whether you are over-billed or under-billed.

If you have billed more than the work completed, you hold other people's cash. If you have billed less, you have fronted costs. Lenders and bonding companies often ask for WIP schedules. Ask your accountant which revenue method fits your contracts.

Retainage, change orders and pay applications

Retainage holds back part of each payment until completion. Track it as a receivable and a payable.

Retainage can lock up cash for months. Change orders need written approval before work starts, or you risk doing unpaid work. Match pay applications to the schedule of values in the contract.

Chart of accounts for contractors

Separate direct job costs from overhead so you can see real job profit and true company profit.

Direct costs include job labor, materials, subcontractors and equipment used on a project. Overhead includes the office, insurance, vehicles not tied to one job, and administrative pay. Keep them in distinct accounts. Your accountant can set up a chart with cost codes that match how you estimate, so estimate-to-actual comparisons are simple.

Payroll, subcontractors and compliance

Classify workers correctly, collect certificates of insurance and keep lien waivers organized.

Misclassifying a worker can bring back taxes and penalties. Collect W-9s and insurance certificates from every subcontractor before they start. Track lien waivers with each payment so you can prove who was paid. Certified payroll may be required on public projects. These records protect you in disputes and speed up audits, bonding and loan reviews.

Reports lenders and bonding companies ask for

Expect to provide a WIP schedule, an aged receivables list, a backlog report and recent tax returns.

Keep these updated monthly rather than scrambling at the last minute. Surety companies look at profit by job, overhead and working capital. Lenders look at bank statements and debt obligations. Consistent, accurate reports make you look reliable and speed approval for bonds and funding alike.

Estimating and bidding with real data

Past job costs make future bids more accurate. Update your cost database after each project.

Record the actual hours, material costs and subcontractor charges for every finished job. Compare to the estimate and note why they differed. After a few jobs you will see which trades and tasks you consistently underbid. Use those numbers to adjust prices, contingencies and markups. See bidding construction jobs.

Keeping cash flow healthy

Contractors pay crews and suppliers weekly but may collect in 30 to 90 days. Plan for that timing gap.

Map expected inflows and outflows by week. See cash flow vs. profit. A line of credit or working capital can cover payroll while an invoice is pending, if job margins exceed the cost. Read funding for construction trades and construction lines of credit. Many funders restrict residential remodeling and new residential construction, so ask early.